Safety stock is inventory you hold as a buffer. The purpose of safety stock is simply to protect your business from delays in your supply chain. In a perfect world, you would never dip into this inventory—it's there as a buffer for you when the unexpected happens and the inventory you ordered doesn't arrive on time.

When we talk about not using your safety stock, we don't mean that you should leave the same items sitting on your shelves forever. They would gather dust, go past their expiration date, and be wasted.

In reality, you want to sell your oldest items first so that you actually use up your safety stock. On paper, your inventory is only slightly larger than you need in a given period of time – and that is your safety stock.

00:00–00:41 – How do you calculate safety stocks and reorder points in inventory management?
00:41 – 01:24 – What is safety stock?
01:24 – 02:39 – Why is safety stock so important?
02:39 – 03:49 – How safety stocks and reorder points work together
03:49 – 04:34 – Can safety stocks be a bad thing?
04:34 – 06:13 – Why is everyone talking about safety stocks now?
06:13 – 07:28 – How to calculate safety stock
07:28 – 08:16 – How to calculate order points
08:16 – 09.09 – Using reorder points with inventory management software

How safety stock and reorder points work together

That's your safety stock – the amount of each product you don't really plan to use, but keep on hand just in case. And then there are reorder points that tell you when to order more.

They are closely linked – and together they ensure that business runs smoothly. Let's look at an example: Suppose you have a certain type of screw that you use to assemble furniture.

Your safety stock for this screw might be 200, your reorder point might be 800, and let's say you have 1,000 left in stock.

As you use up screws in the production of tables and chairs, the remaining quantity decreases until your reorder point is reached, at which point you place an order for more screws with your supplier.

While they pick, pack and ship your order – maybe even manufacture it – they are still using screws. But luckily, the new stock arrives before it runs out, because

Instead of relying on guesswork, you used the correct reorder point formula to determine the right time to purchase – and because you factored in safety stock to cover any delays.

How to calculate safety stock

Now we are ready to calculate our safety stocks and reorder points.

All we need is some current data about each inventory item. We'll use the example of screws used in a furniture factory, but you'll use the same process when working with finished products that you sell in a store.

So we need to know

Our maximum daily usage and our average daily usage of this item

Plus our maximum delivery time in days and our average delivery time for this item

And then we just plug those numbers into the formula. I like to use a calculator – this is a free one we made at Unleashed.

For the screws we want to order, let's say the most we have ever used in the factory is 100 pieces in one day. And on average we use 90

Let's say that on average it takes five days for them to arrive after ordering, but recently it has taken up to 15 days.

We simply plug these numbers into the formula: maximum daily usage times maximum lead time minus average daily usage times average lead time

This results in our safety stock, which in this case is 1,050 screws.

How to calculate order points

Now we take that safety stock number into our reorder point formula. Again, there's a calculator on the same page we used, and we'll take the same data and calculate it a little differently. This time we'll take our average daily usage of 90 screws per day.

Multiply it by the average lead time of 5 days – remember, this is the time it takes for the screws to arrive and be ready to use, from the time the order is placed. And then we add our safety stock of 1,050 screws, which gives us a reorder point of 1,500.

So there we have it – we now know that even if our order takes longer than ever, we shouldn't be left out of stock if we place our order when there are only 1,500 left in stock.

Looking for the free inventory calculators shown in the video? You can find them here: https://www.unleashedsoftware.com/inventory-formulas

For more information about our inventory management and inventory management techniques, please also check out our free inventory management guide: https://www.unleashedsoftware.com/inventory-management-guide
For more information about Unleashed, visit http://www.unleashedsoftware.com

Or check out detailed free demos of Unleashed here: https://www.unleashedsoftware.com/inventory-management-software-demo

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